The fifth column’s new front

Pro-Russian oligarchs have begun a serious push to persuade Ukrainians that the only way to a better life is to renew “torn” economic ties with Russia. This flies in the face of facts on the ground

In a while, September 2016 could be recognized as the time when a new front opened in Russia’s hybrid war. A huge campaign has just unfolded to “renew economic ties with Russia,” as a supposed panacea for Ukraine in its difficult socio-economic situation. Pubic opinion is actively been bombarded with a myth about how the economic crisis and the falling standard of living are the result of Ukraine’s economy turning more towards the West.

But the claims being disseminated in the press are completely contradicted by facts. For instance, Ukraine lost the Russian market because of its association with the EU. Or Ukrainian manufacturers have no chance of making it on European markets and the reorientation towards EU markets is turning Ukraine’s economy into a producer of raw materials. With the help of such statements, Ukrainian society, worn down by social problems, is being seduced by the promise of a “simple” solution: rejecting the policy of mutual sanctions and restoring trade ties with Russia—supposedly broken at Ukraine’s initiative—could compensate the economic losses of recent years and restore the standard of living that Ukrainians had prior to the start of Russian aggression.

Initially, the press was warmed up with a series of announcements whose contents were in the tradition of Russian lobbyists among current and former Opposition Bloc members, such as Yevhen Murayev, Vadym Novinskiy, Yuriy Boyko, Oleksandr Vilkul, and Mykola Skoryk. Murayev’s NewsOne channel has been busy spreading manipulated surveys among its viewers, promoting the opinion that “more than 75% of respondents want to restore economic relations with Russia.”

Meanwhile, other members of the previous regime have begun to join them, such as deputy leader of Vidrodzhennia [Rebirth] Vitaliy Khomutynnik, who is linked to tycoon Ihor Kolomoyskiy; MP from the Volya Narodu [The Will of the People] deputy group Volodymyr Lytvyn, and Yakiv Bezbakh, an independent MP who represents another oligarch in the Rada, ex-president Leonid Kuchma’s son-in-law Viktor Pinchuk. The ranks of those actively lobbying for a reversal of the country’s direction towards Russia are regularly filled by people who had been quiet on this issue since the Euromaidan.

Pinchuk himself, judging by the activeness of Bezbakh and frequent reports on this issue on his television channel, ICTV, also became one of the main organizers of the so-called “International Economic Forum” at the Kyiv Hilton, right next to the main sponsors from the OppBloc. Taking place on September 21, the event came almost immediately after the Pinchuk-funded Yalta European Strategy or YES Summit, and was clearly a manifesto rejecting European integration and returning to the Kuchma era “multivectoral” policy, with a special accent on restoring “vitally important” economic ties with Russia.

The IEF gained its status as ‘international’ thanks to the fact that MEPs of clearly pro-Russian orientations, representatives of the embassies of Russian satellites in the Eurasian Union—Belarus, Kazakhstan and Kyrgyzstan—participated in it, alongside Ukrainian MPs, the deputy Minister of Justice, and department heads from the Ministry of Economic Development, the Finance Ministry, the State Fiscal Service, and a number of ex ministers.

According to one attendee, Romanian MEP Laurenţiu Rebega said, “Ukraine is not moving towards economic recovery today. The time has come for the Government of Ukraine to restore ties with Russia. The old Ukrainian-Russian partnership, which has suffered since 2014, could offer a new way out of the crisis for the sake of a stable future and economic growth. This is the only thing that will pull Ukraine out of the general crisis it is in.”

Some old Ukrainian faces came out at the forum as well, such as Yevhen Chervonenko, once Viktor Yushchenko’s closest confidant and a former minister of transport who owned a major trucking and beverages company called Orlan. “If we acted normal, dialog with Russia would be possible,” he said. “Europe doesn’t need us and it’s not going to let us enter its markets.” Another former Cabinet member, ex-economy minister Viktor Suslov claimed that Ukraine’s economy was on a downward slid and was becoming a raw material economy, while Europe was putting pressure on Ukraine to export raw materials rather than finished products.

At the conclusion of the event, a resolution was passed stating that it was necessary to restore trade and commercial ties with Russia and addressed to the President, PM and VR Speaker. The basic message of the document was this: “Ukraine should espouse a multivectoral foreign policy approach and restore economic relations with traditional markets by setting up an inter-government group with Russia.” This was the initiative of that same Yakiv Bezbakh, who declared adamantly, “From an economic point-of-view, Ukraine cannot function normally without its traditional markets. We need to revive cooperation because that’s our future.”

Myths and facts

In fact, statements about Ukrainian deliveries to Russia being cut back because of a “break in economic relations” after the Euromaidan or after the signing of the Association Agreement with the EU are a complete myth. Trade between the two countries has been falling apart for a long time as a result of objective processes that are either completely unrelated to the Revolution of Dignity or are only very indirectly related. In any case, there was never any “break” initiated by Kyiv, with the exception of MIC production.

And so no “miraculous effect” can be anticipated from restoring these ties, contrary to the claims of this fifth column and no panacea for the domestic economy, in fact. All that this really is, is a convenient slogan propagandizing the stereotypical thinking of certain elements in Ukraine’s population.

Ukraine’s suppliers were squeezed out of the Russian market as part of a long-term strategy of import substitution in the RF. In addition, because part of Ukraine’s manufacturers are stuck on Russian and post-soviet markets instead of looking for opportunities to compete on world markets for the last decades, they have understandably lost their competitive edge even in the Russian market. All this was compounded more recently by problems in Russia’s own economy and resulted in overall cutbacks in imported goods.

The objective reasons were compounded by various Russian-instigated trade wars that banned key Ukrainian products from its markets and eliminated those suppliers, the purpose of which was to force Ukraine to make concessions and eventually give up its sovereignty. All of this began long before the Euromaidan or the signing of the Association Agreement and were the result of Russia’s own hostile attitude to relations with Ukraine—a stick-and-carrot approach intended to reach key Moscow goals that relied on the stick more often than not.

And so the minimum that would be needed to change the long-term negative trends in Ukrainian-Russian bilateral relations would be complete capitulation by withdrawing from the Association Agreement and integrating into the Eurasian Union—something Ukraine would never agree to. Any other negotiations or concessions would do nothing to stop Russia’s discriminatory practices against Ukrainian imports.

Facts are such stubborn creatures

If we compare the volume of exports from Ukraine to Russia before and after the Euromaidan and the signing of the Association Agreement, we can see that the reduction in overall value was really striking, falling from US $8.94bn in the first seven months of 2013 to US $1.88bn in 2016. However, direct losses from Russian sanctions against Ukrainian producers, which might hypothetically be the subject of any negotiations, amounted to only a small fraction of this.

The greatest decline in exports to the RF was, in fact, from Donetsk and Luhansk Oblasts, Crimea and Sevastopol. In the first seven months of 2013, they constituted US $2.44bn, while during the same period of 2016 they were only US $0.32bn or about one eighth. However, these losses have nothing to do with a “breaking of economic ties,” but with Russia’s aggression against Ukraine. What’s more, the decline of US $2.12bn from these oblasts to overall exports to the RF in this case was not as significant, as the decline of US $8.2bn in all Ukrainian exports to all trading partners over January-July 2016, compared to the same period of 2013.

If we compare exports to Russia from Ukrainian territory outside of occupied Crimea and war-torn Donbas, over January-July 2016, they were worth US $1.56bn versus US $6.5bn over the same period of 2013. But most of that loss is not connected to “a break in economic links” between Ukraine and Russia, and so they cannot be compensated for even if ties are “restored,” the way the fifth column would have Ukrainians believe.

According to figures from the Federal Customs Service of Russia, all Russian imports in that time also declined by 50%, dropping from US $179.3bn to US $94.8bn. As prices for fuels and other resources that Russia relies on fell on world markets, consumer spending among Russians also went down as their purchasing power shrank, although prices on many of goods also went down during this period. Even among Customs Union members, where there was ostensibly no “break in economic links,” imports to the RF over January-July 2016 were also down by around 50%, to US $6.94bn, compared to US $13.34bn in the same period of 2013.

In short, no matter what the circumstances, Ukrainian exports to Russia would have fell by nearly half during this period—more, in fact, since heavy machinery historically represented a larger share of exports. This is the item in imports to Russia from CIS countries that saw the greatest declines starting in 2013, when it plummeted from US $8.66bn over January-July 2013 to US $2.39bn.

If we exclude Ukraine from the CIS figure, then heavy machinery deliveries to Russia still fell by 67%, while deliveries from Ukraine fell by nearly 80%. This suggests that at least half of Ukraine’s losses over this period wee the result of the overall situation with imports from post-soviet countries. The other half was largely the result of military activity in Donbas and the RF’s long-term strategy of rejecting certain categories of Ukrainian-made products, such as locomotives.

First of all, over January-July 2013, nearly US $1.2bn of the US $3.2bn of Ukraine’s exports to Russia was locomotives, more than half of them made in Luhansk and Donetsk Oblasts. By the same period of 2016, this figure was down to US $45mn, and none of it came from the Donbas. Secondly, a steep and steady reduction of sales of Ukrainian locomotives to Russia was evident even before the AA with the European Union was signed and while the economic situation in Russia was still quite positive: over 2013, US $450mn-worth less was bought than in the same period of 2011.

And the rest of Ukraine’s export industries

A similar situation can be seen with deliveries of Ukrainian metals and metal products to the RF. According to DerzhStat data, 75% of all the cut exports of ferrous metals over January-July 2016 compared to 2013 was originally from Luhansk and Donetsk Oblasts and occupied Crimea. When these two factors are taken into account, it becomes obvious that the reduction of Ukrainian metal deliveries on the Russian market was not at all tied to a “break in economic relations,” but completely proportional to objective circumstances that also affected deliveries from other CIS countries whose ties to the RF hadn’t been “broken.”

In fact, foodstuffs were the one category where the loss of deliveries to the Russian market compared to other countries affected Ukrainian food processors the most and the least proportionally in the last three years. Over the first seven months of 2016 they were delivering 3% of what they had delivered in 2013: US $51.8mn vs US $1.75bn. On the other hand, Ukraine’s food producers have plenty of opportunities to compensate these losses by moving to other markets.

Cuts in Ukrainian deliveries of goods to the RF market in the vast majority of other branches either matched overall reductions of similar imports to Russia or reflected the cessation of trade from occupied Donbas and Crimea. The exceptions were Ukraine’s chemicals and light industries, where the losses were more significant.

If we exclude alumina, which is produced near Mykolayiv by the Russian aluminum monopolist for its own needs, deliveries of chemicals to the RF plunged from US $520mn over January-July 2013 to US $140mn in the same period of 2016, down 73%, while total imports of chemical products to Russia over this period went down by only 33%. Here, too, however, the high concentration of enterprises in the Donbas and the lost of their competitive edge because of the growing cost of natural gas had an impact. And some products were affected by a specific ban, in addition to foodstuffs, from the RF coming into effect from January 1, 2016.

Deliveries of goods from Ukraine’s light industry went down by 70% even though total imports of such goods to Russia went down 43%. In short, the option of a widespread improvement of Ukrainian deliveries to the Russian market is nothing more than wishful thinking—or a fiction designed to fool people into believing that it will somehow improve the Ukrainian economy.

The myths of Russian good will and EU exploitation

This is not the first time The Ukrainian Week has concluded that any attempt to come to an agreement with Moscow in the framework of one “working group” or another will have no positive impact on Ukraine whatsoever. An example of the futility of this was the so-called “Brussels compromise” reached in September 2014, which postponed the economic part of Ukraine’s Association Agreement with the EU by 15 months in exchange for Russia curtailing restrictive measures against Ukrainian imports. In fact, deliveries continued to be steeply cut, falling from US $733.1mn in September 2014 to US $464.0mn a year later. And once the economic part of the AA came into force, the decline actually slowed down, declining only to US $341.7mn one year later, in September 2016. Even this was largely due to a ban on food imports to Russia after a Moscow embargo kicked in on January 1, 2016.

In light of all this, the attempts by the Kremlin’s fifth column in Ukraine today to lobby the revival of economic ties could be a reflection of Moscow’s loss of its traditional instruments for pressuring Ukraine through trade-based blackmail. It has simply run out of the means of applying such pressure on its neighbor. To a large extent, this is testimony of the fact that Russia has lost in its permanent trade war against Ukraine: it failed to achieve its objectives and its options for continuing the war have been exhausted.

This means that the way to improve the socio-economic situation in Ukraine lies, not through pointless efforts to turn back the clock, as the fifth column keeps proposing, but in actively looking at opportunities to replace the permanently lost Russian market with new niche markets in Europe and other promising domestic and foreign markets. Whining about Ukrainian products not being needed on EU or third country markets simply reflects the reluctance of pro-Russian business to change and become more flexible and adaptable. Those companies that want to and are putting the necessary efforts are gradually finding opportunities and niches in the European market. It may be happening more slowly than one would wish, but Ukraine is also integrating into the production cycles of leading translational corporations.

Certainly deliveries to the EU are affected by quotas and caps, but this mainly affects agricultural products, the “commodity-based” that the fifth column so likes to complain about. In other words, the EU is actually making it harder for Ukraine to export raw materials and is not setting up any obstacles to the delivery of most finished goods from Ukraine. Relations with the EU are the subject of a separate article, but the key elements can be briefly set out: Ukrainian exports to the EU shrank only 6.1% over 2013-2015, from €12.5bn to €11.73bn, mostly as the export of raw materials was reduced. For instance, mineral exports fell by 38.9%, oilseeds by 38.2%, and unfinished ferrous metals by 22.8%. Meanwhile, deliveries of aircraft rose 160%, processed meat and fish increased 150%, glass products 140%, shipbuilding products 110%, transport vehicles 80%, alcoholic and non-alcoholic beverages 70%, furniture 50%, instruments and tools went up 36%, sugar and confectioneries 35%, cocoa products 30%, electronics 15%, and other machinery and equipment 8%.

The fact that Ukraine’s exports to the EU really are currently dominated by raw materials is a reflection of the reality on the ground long before the Association Agreement went into effect. But the outcome is the exactly opposite trend: active growth of deliveries of finished, mostly industrial, goods as deliveries of raw materials shrink.

Clearly, a certain part of Ukrainian “business” is hung up on “traditional markets” and the exploitation of outmoded soviet industrial facilities it took over long ago and is incapable of starting up or growing new businesses. None of this is related to the EU or the Association Agreement. In fact, these businesses would not even need to necessarily compete on European markets with European companies: it would be more than enough if they simply looked to Asian markets and competed in markets outside the European Union.